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Taco John
09-16-2008, 11:10 PM
Fannie and Freddie

by Rep. Ron Paul, MD

Ron Paul in the House Financial Services Committee, September 10, 2003

Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Dr. Ron Paul is a Republican member of Congress from Texas.

http://www.lewrockwell.com/paul/paul128.html

KILLER_CLOWN
09-16-2008, 11:40 PM
Ron Paul coulda/woulda/shoulda been POTUS! but he's a whacko! ;)

irishjayhawk
09-16-2008, 11:41 PM
He is a whacko in many ways. He is also smart in many others.

jAZ
09-16-2008, 11:43 PM
Fannie and Freddie

by Rep. Ron Paul, MD

Ron Paul in the House Financial Services Committee, September 10, 2003

Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Dr. Ron Paul is a Republican member of Congress from Texas.

http://www.lewrockwell.com/paul/paul128.html

Let's be clear here...

Every company that is "too big to fail" is a defacto "GSE". I don't know why he's trying to hang this on Fan and Fred. The only way to truely avoid the government sponsorship of this sort of bailout is to prevent companies from getting to the "too big to fail" point.

Or live with the chaos that is radical swings in economic conditions tied to wild swings in the success/failure of the free markets.

Our national fiscal stability is a reason that our country is (or was) a destination for worldwide investments. The unfettered freemarkets would hurt our international competitiveness.

Silock
09-17-2008, 12:01 AM
Let's be clear here...

Every company that is "too big to fail" is a defacto "GSE". I don't know why he's trying to hang this on Fan and Fred. The only way to truely avoid the government sponsorship of this sort of bailout is to prevent companies from getting to the "too big to fail" point.

Or live with the chaos that is radical swings in economic conditions tied to wild swings in the success/failure of the free markets.

Our national fiscal stability is a reason that our country is (or was) a destination for worldwide investments. The unfettered freemarkets would hurt our international competitiveness.

Giving special incentives to corporations is not a true free market system and that's what we've been doing. A truly free market would prevent them from getting "too big too fail" through creation of competition. I'm not saying we don't need regulation to ensure fair business practices, because we do, but we need to stop giving special incentives to corporations. We've done that too much, and it comes from both parties. Everyone has had their hands in this mess.

jAZ
09-17-2008, 12:11 AM
Giving special incentives to corporations is not a true free market system and that's what we've been doing. A truly free market would prevent them from getting "too big too fail" through creation of competition. I'm not saying we don't need regulation to ensure fair business practices, because we do, but we need to stop giving special incentives to corporations. We've done that too much, and it comes from both parties. Everyone has had their hands in this mess.
Companies will always implement and exploit barriers to entry that will prevent the sort of open and fair markets that allow the theory of competition to have the impact you are talking about.

Having a stable ecomomy is something that we just take for granted as a given, but in an unregulated (ie, self regulating) system... we woudl have wild swings in our economy that create uncertainty and risk that make us a less desireable place to invest.

People always ignore this fact when looking at much of the regulatory discussions.

Taco John
09-17-2008, 12:11 AM
Let's be clear here...

Every company that is "too big to fail" is a defacto "GSE". I don't know why he's trying to hang this on Fan and Fred. The only way to truely avoid the government sponsorship of this sort of bailout is to prevent companies from getting to the "too big to fail" point.

Or live with the chaos that is radical swings in economic conditions tied to wild swings in the success/failure of the free markets.

Our national fiscal stability is a reason that our country is (or was) a destination for worldwide investments. The unfettered freemarkets would hurt our international competitiveness.



Wild swings? Where have you been the last twenty years?


Why not just socialize everything? It's a serious question. If we're not going to let companies fail because of "chaos" due to their failures, then what's the point of the whole facade?

Taco John
09-17-2008, 12:11 AM
Having a stable ecomomy is something that we just take for granted as a given, but in an unregulated (ie, self regulating) system... we woudl have wild swings in our economy that create uncertainty and risk that make us a less desireable place to invest.

False.

Uncle_Ted
09-17-2008, 12:26 AM
A truly free market would prevent them from getting "too big too fail" through creation of competition.

Are you the Herm Edwards of economics?

Silock
09-17-2008, 12:27 AM
Companies will always implement and exploit barriers to entry that will prevent the sort of open and fair markets that allow the theory of competition to have the impact you are talking about.

Having a stable ecomomy is something that we just take for granted as a given, but in an unregulated (ie, self regulating) system... we woudl have wild swings in our economy that create uncertainty and risk that make us a less desireable place to invest.

People always ignore this fact when looking at much of the regulatory discussions.

Again, where did I say it was to be completely unregulated?

And "wild swing" are part of economics, and generally, healthy. What you need is a sustainable long-term trend, which is not what has been going on. What has happened was not in any way sustainable.

Silock
09-17-2008, 12:27 AM
Are you the Herm Edwards of economics?

Are you the Carl Peterson of the D.C. forum?

Uncle_Ted
09-17-2008, 12:28 AM
Having a stable ecomomy is something that we just take for granted as a given, but in an unregulated (ie, self regulating) system... we woudl have wild swings in our economy that create uncertainty and risk that make us a less desireable place to invest.



True.

Direckshun
09-17-2008, 12:28 AM
He was dead on.

Direckshun
09-17-2008, 12:29 AM
But, I do wonder, what would Ron "let's basically free companies of any regulation" Paul would have done to prevent this matter. It's entirely possible I'm just dumb on the issue, but isn't "getting out of the way" what Paul supports, and isn't that what we've done here?

It seems that the resolution to this problem would have had to have been regulation.

Uncle_Ted
09-17-2008, 12:30 AM
Again, where did I say it was to be completely unregulated?

And "wild swing" are part of economics, and generally, healthy. What you need is a sustainable long-term trend, which is not what has been going on. What has happened was not in any way sustainable.

Um, an unregulated market is typically what people mean when they use the code words "truly free market".

jAZ
09-17-2008, 12:31 AM
Wild swings? Where have you been the last twenty years?


Why not just socialize everything? It's a serious question. If we're not going to let companies fail because of "chaos" due to their failures, then what's the point of the whole facade?

We put controls in place to keep us out of a wild downward depression-like swing. They are emergency breaks.

As with anything in life, it's about a healty balance.

Uncle_Ted
09-17-2008, 12:32 AM
Are you the Carl Peterson of the D.C. forum?

If by "Carl Peterson" you mean someone who was actually awake during my macroeconomics lectures, then yes.

jAZ
09-17-2008, 12:33 AM
Again, where did I say it was to be completely unregulated?
Where did I say you said that?

I'm clarify and supporting my point.

ROYC75
09-17-2008, 12:33 AM
You almost always ask for trouble when you deregulate something . Been proven , time after time ......

Logical
09-17-2008, 12:37 AM
Dude has always had his shit together on economic issues.

Uncle_Ted
09-17-2008, 12:43 AM
FTR I think Ron Paul was mostly correct. This mess was primarily caused by a weakening of regulatory standards combined with government subsidizing the mortgage market.

Silock
09-17-2008, 12:43 AM
Um, an unregulated market is typically what people mean when they use the code words "truly free market".

Sorry, but generalizations suck.

There is no way you could have a market, at least at this stage in the game, that would be run ethically without some kind of government oversight to make sure that they were playing by the rules. It's just not going to happen. People are way too greedy.

However, bearing that in mind, if you eliminate the favoritism of these large corporations in our economy and remove restrictions that allow for competition, that can do nothing but good. Those are "free markets." We don't have that system in place right now, even with all the "deregulation" that's gone on. If we removed the regulations we have right now, it still wouldn't be a free market, because it doesn't solve the root of the problem.

These companies haven't been playing by the rules, and now everyone is paying for it. That's not because of deregulation -- it's because of flat-out irresponsibility and a failure in just about every branch of government to let it get this far.

Silock
09-17-2008, 12:45 AM
Where did I say you said that?

I'm clarify and supporting my point.

Well, you quoted me and then went on to talk about complete deregulation, so I just kinda figured you were referencing my post.

Silock
09-17-2008, 12:46 AM
Not worth it.

Silock
09-17-2008, 12:49 AM
We put controls in place to keep us out of a wild downward depression-like swing. They are emergency breaks.

As with anything in life, it's about a healty balance.

I agree with that. The problem is that constant bailouts create complacency in the business world. Some companies MUST be allowed to fail. AIG is not one of those companies.

Perhaps the best thing would be to break up these giants like AIG, AT&T style.

jAZ
09-17-2008, 12:56 AM
I agree with that. The problem is that constant bailouts create complacency in the business world. Some companies MUST be allowed to fail. AIG is not one of those companies.

Perhaps the best thing would be to break up these giants like AIG, AT&T style.

That's where I was heading.

The only way to effectively avoid any private company from becoming a "GSE" is prevent them from becoming "too big to fail". That requires regulation, which is the antithesis of modern conservative economic theory. Or better said, we've allowed the supposed conservative phlosphy to run amock. Clinton is partly to blame for that.

We need a dramatic pull back from those policies to create that balance right now. Expanded reglation is needed.

Silock
09-17-2008, 01:03 AM
That's where I was heading.

The only way to effectively avoid any private company from becoming a "GSE" is prevent them from becoming "too big to fail". That requires regulation, which is the antithesis of modern conservative economic theory. Or better said, we've allowed the supposed conservative phlosphy to run amock. Clinton is partly to blame for that.

We need a dramatic pull back from those policies to create that balance right now. Expanded reglation is needed.

I don't know that it's against modern conservative economic theory when it comes to extreme situations like this.

There's no problem with companies becoming "too large." It's when they become too large and then begin mis-managing themselves and require bailouts. There should be no penalty for a large company that does well. But, if they require a bailout, it should come at the penalty of being broken up into bite-size chunks that won't be problems in the future.

Again, we're speaking sort of the same language, except I don't believe that the solution is just more blanket regulation. What is needed is the right KIND of specific regulation, with elimination of corporate favoritism.

As Greenspan said, the problem we have now is that the Fed drew a line in the sand and said "If you're bigger than Stearns, and you fail, we'll bail you out." That's a bad, bad, bad message.

jAZ
09-17-2008, 01:15 AM
I don't know that it's against modern conservative economic theory when it comes to extreme situations like this.
Modern conservative practice is maybe a better way to say it. The current incarnation has been to press for massive deregulation in amost every industry and allow for mega consolidations in all sorts of industries.

That's lead to this "extreme situation". It's not a benign by counterpart to it.
There's no problem with companies becoming "too large." It's when they become too large and then begin mis-managing themselves and require bailouts.
Catch 22.

When a company becomes overly large (too large to fail) there is a moral management dilema which says I as a manager owe it to my investors to take exploit the high-risk profits that I can pursue without the downside risk that would otherwise prevent me from making such moves.

But, if they require a bailout, it should come at the penalty of being broken up into bite-size chunks that won't be problems in the future.
At that point, it's too late. They are a mere shell of their formerly large-selves.
Again, we're speaking sort of the same language, except I don't believe that the solution is just more blanket regulation. What is needed is the right KIND of specific regulation, with elimination of corporate favoritism.
I don't know that we are talking about differnet things. I'm just pointing out the flaws in the current system. I'm not proposing a detailed solution, and I'm not sure what a blanket regulation might be.
As Greenspan said, the problem we have now is that the Fed drew a line in the sand and said "If you're bigger than Stearns, and you fail, we'll bail you out." That's a bad, bad, bad message.
I agree completely.

Silock
09-17-2008, 01:38 AM
When a company becomes overly large (too large to fail) there is a moral management dilema which says I as a manager owe it to my investors to take exploit the high-risk profits that I can pursue without the downside risk that would otherwise prevent me from making such moves.

There's a difference between taking an acceptable risk and then intentionally ****ing with the market for your own greed, the latter of which is what happened. That's where the good regulation comes in.

At that point, it's too late. They are a mere shell of their formerly large-selves.

But they still own their assets, presumably. It may be too late for them to stay solvent as a large company, but their assets don't just disappear. They have to go somewhere.